Unpacking the Collection Due Process Case of Melasky v. Commissioner Part 1: The Delay

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The Tax Court issued two opinions in the Collection Due Process (CDP) case involving the Melaskys. In 151 T.C. No. 8 it issued a precedential opinion holding that a challenge to the crediting of payment is reviewed pursuant to an abuse of discretion standard and not de novo. See our post on the case here. In 151 T.C. No. 9 it issued a fully reviewed precedential opinion addressing the collection issues raised in the case before sustaining the determination of the Appeals employee and allowing the IRS to move forward toward levy. As discussed more fully below, this case took way too long to resolve. We suggest that it serve as a sign that the process needs to change in order to go back to its original design.

I acknowledge that by suggesting the system move more quickly some low income taxpayers who gather information slowly may be disadvantaged.  The IRS already closes cases based on lack of taxpayer responsiveness – and it should.  Except for taxpayer who seek to use CDP to delay, I think that quicker movement by Appeals and the Court actually benefits most low income taxpayers because they stay engaged in the process.  When their case goes on the shelf for six months or a year, they disengage.  At the Appeals stage taxpayers generally have a relatively short time to reengage and that hurts low income taxpayers.  I would rather see early engagement with a slightly longer time to respond.

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The Melaskys filed their Tax Court petition on May 21, 2012. The Tax Court rendered its opinion on October 10, 2018. That’s way too long. When Congress created CDP it only gave taxpayers 30 days to file their request for a CDP hearing after the mailing of the CDP notice and only gave taxpayers 30 days to file their Tax Court petition after mailing of the CDP determination. The extremely short time frame provided to taxpayers in CDP cases reflected Congressional intent that these cases move quickly because delay in collection often proves fatal to successful collection. Congress placed no time limits on either Appeals or the Tax Court even though it placed these tight time frames on taxpayers. Carl Smith and I wrote about the disparity in a pair or articles, here and here, back in 2009 and 2011 analyzing that both Appeals and the Tax Court took longer to resolve CDP cases than deficiency cases. This could not have been what Congress intended. Since our articles, my non-empirical observation is that CDP cases may be moving faster in Tax Court because IRS counsel is filing more motions for summary judgment, the court rules require that they be filed earlier and the Tax Court disposes of most of the cases slightly quicker. The Melasky case shows the opposite side of the coin.

The Tax Court has decided not to adopt procedures that would move CDP cases on a faster track than deficiency cases. This case provides a perfect demonstration of why Bryan Camp calls CDP the 11th Taxpayer Bill of Rights provision – the right to delay. Appeals also has not created procedures that fast track CDP cases. Maybe it’s time to rethink the process and move these cases through the system with the speed Congress anticipated. Congress would not have anticipated it created a process that caused a case to take almost six and ½ years to work its way through the Tax Court to the point of an opinion.

Can it be so hard to move CDP case quickly through the system of Appeals and Tax Court review? In addition to the six plus years this case has spent in Tax Court to this point, the case spent 14 months in Appeals. Taxpayers filed their CDP request on February 9, 2011. Appeals held the initial hearing over six months later on August 25, 2011. The hearing occurred back in a bygone era when taxpayers could obtain a face to face hearing. I read that part of the opinion with nostalgia wondering how they received a face to face meeting until I looked at the dates. Appeals issued the notice of determination on April 20, 2012.

These taxpayers were no strangers to collection by the time they made their CDP request. They have liabilities going back to 1995 with multiple proposals for offers in compromise and installment agreements strewn along the way. Maybe it took six months just to send their undoubtedly voluminous collection file over to the Appeals Office but it seems that Appeals could create a system of moving these cases quickly into hearing. CDP was loosely modeled on CAP appeals which are to take place within five business days after the request. That time frame would not allow Appeals to perform the verification required by the statute but it should not take months to engage in the verification and the evaluation of taxpayer’s collection proposal.

The Appeals employee working this case gave the taxpayers months to liquidate their assets. As will be discussed in Part 3, taxpayers failed to liquidate all of their assets and that ultimately led to the determination to sustain the levy. The taxpayers here were able to actively delay the case because Appeals lacks a triage system. Appeals needs to adopt a triage system that gets to the taxpayer quickly to engage in a conversation about what is expected and necessary for a successful outcome. Then it can perform its verification and balancing while the taxpayer provides the necessary information to support its request. Treat the initial hearing like a CAP hearing to get the process going. By waiting six months just to hold the initial hearing, the CDP process will necessarily move slowly. In our article from nine years ago Carl and I made the following proposals:

To carry out the intent of the creators of CDP for an expedited process, the authors propose that the tolling of the statute of limitations on collection end six months after the CDP notice is sent if the taxpayer makes a timely CDP request. However, the authors would not propose altering one current protection of the CDP statute that in no event can the collection period expire before the 90th day after the date on which there is a final determination by the IRS or the courts) in that hearing….

To address the issue of mounting interest and time sensitive penalties, another possible avenue for revision of the statue is to adopt a provision similar to section 6404 (b) to stop the further accrual of interest and penalties once the administrative portion of the hearing exceeds six months.

The Tax Court also could adopt procedures to move these cases faster. It could give the IRS 30 days to file the answer instead of 60 days. It does not take very long to deny everything. It could schedule a telephonic conference within 30 days of the case coming at issue and encourage summary judgment motions from the parties at that point. In our article seven years ago Carl and I made the following proposals:

We recommend that the Tax Court amend its rules and adopt procedures that foster the early movement of CDP cases through the court. Under a new rule in Title XXXII of the Tax Court Rules (perhaps Rule 335) Chief Counsel should be required to file within 14 days after the case is at issue (1) the administrative record and (2) a current literal transcript of the taxpayer’s account for the years at issue.

Following this filing, the court should either issue an order to show cause or an order for the filing of a report by the parties. This would require the taxpayer to state how the administrative record might be inaccurate or incomplete, and it would require both parties to state why the case should not be decided on the administrative record. This order should also note that supplementing the administrative record may be possible on a party’s request and any needed discovery should be raised with the court at that time. The parties should be given a relatively short time to identify any additional evidence they think is needed to supplement the record or to convince the court that additional discovery is necessary We recommend that the period for the parties to respond to the Court’s order be no more than 30 days.

This case should be a wake-up call that the CDP process is broken and that in 20 years the players have not taken steps to avoid making it Collection Delay Process instead of Collection Due Process. Of course a fraction of the cases will take more time to resolve but none should take six and ½ years and the vast majority should be resolved within months and not years allowing collection to proceed when needed and stop when appropriate. Cases involving a merits or an innocent spouse determination would obviously move on a slower track more in line with regular cases of those types while pure collection cases would get resolved quickly to allow the process to work as intended.

 

Comments

  1. Why was the case transferred from J. Holmes to J. Thornton? Certainly, that must’ve added to the delay.

    • Carl Smith says:

      Judge Holmes drafted a proposed opinion that the Chief Judge or another judge who saw the draft thought was wrong (except for the standard of review issue). So, instead of letting that draft opinion out, the Chief Judge sent the draft opinion for en banc review, where Judge Holmes got outvoted. One of the judges who voted against Judge Holmes was then given the task of drafting a majority opinion. That judge may even have circulated a counter-draft opinion before the vote. Judge Holmes then revised his draft opinion into a dissent. My guess is that the process of en banc review and the drafting of numerous opinions added only six months to the process.

  2. You make some good points. However, the IRS is backlogged because it is under-staffed and under-funded. A “fast track” CDP would require additional staff and resources the IRS does not have.

    Second, giving taxpayers a little bit of extra time can be in everybody’s best interests. A six year delay is excessive, but sometimes taxpayers can make good use of the six months or so of breathing room a CDP gives them.

    To give an example, at this time of year, I see many clients that are not ready to set up an installment agreement. They have not made an estimated tax payment to the IRS or state all year and are in no position to make three quarters of catch up payments. If they were set up on an installment agreement based on their current financials, they would be set up for failure.

    The installment agreement payments they will make will siphon their entire disposable income to the prior years’ tax debts and leave nothing for current estimated tax payments. (The IRS will not give them credit for estimated tax payments they are supposed to make, only estimated tax payments they actually make.) They will default the installment agreement once they file their 2018 returns and continue the cycle.

    Give these clients some time to set up an installment agreement, and they have the opportunity to set themselves up for success. They can file their 2018 return early in 2019 and lump in their 2018 balance into their payment plan. They can establish the habit of making estimated tax payments to the IRS and state. They may even be able to make whatever lifestyle adjustments they need to make in order to make their estimated tax payments. This extra time is not only beneficial to the taxpayer, but the government as well because the taxpayer is no longer stuck in a cycle of continuously owing taxes.

    • I agree that it is possible for the delay in Appeals to benefit clients who need the time to catch up. I certainly use it that way for some of my clients as well. On balance, I think the system would benefit from eliminating the delay but recognize there are cases in which it is beneficial to individuals and to the system.

      While the underfunding of the IRS certainly makes it more difficult for the IRS to process cases quickly, the first article I wrote on this was in 2009. The amount of time to work a case remains the same whether you work it six months out or immediately. There are ways the IRS can retool the CDP process to make it more efficient but I recognize the challenges that the underfunding presents here and in other contexts.

  3. Norman Diamond says:

    “See our post on the case here.”

    I think here is:
    http://procedurallytaxing.com/tax-court-clarifies-standard-of-review-in-cdp-payment-disputes/

    “The IRS already closes cases based on lack of taxpayer responsiveness – and it should.
    […]
    When Congress created CDP it only gave taxpayers 30 days to file their request for a CDP hearing after the mailing of the CDP notice and only gave taxpayers 30 days to file their Tax Court petition after mailing of the CDP determination.”

    The IRS isn’t as bad in closing CDP cases as in other kinds of cases, but something still needs to be done about accusations of non-responsiveness. The IRS often sends letters by sea mail from Estonia, Germany, or the UK to the rest of the world. Sometimes the IRS sends letters by air mail from those same countries. I don’t know how long the IRS delays before mailing because there are no dates in the postal meters. Some of these letters demand responses within 10 or 20 days and the IRS closes the cases because the IRS’s letters weren’t delivered yet and maybe weren’t even mailed yet. (Cf. Atuke v. CIR which was blogged here a while back.)

    Also what about IRS non-responsiveness. In recent years the IRS sometimes sends letters acknowledging letters from taxpayers but stating that the IRS needs more time, and some day there will be some 30-day period in which the IRS might send another reply. One question has been waiting 8 years for an answer but has become moot; others aren’t moot. Also one at least one CDP case isn’t full closed yet, still waiting for a Notice of Determination six years after the IRS issued four Notices of Determination for assorted parts of one Request for CDP Hearing.

    “Under a new rule in Title XXXII of the Tax Court Rules (perhaps Rule 335) Chief Counsel should be required to file within 14 days after the case is at issue (1) the administrative record and (2) a current literal transcript of the taxpayer’s account for the years at issue.”

    That would be good. Even better would be to require Appeals to give the taxpayer a transcript before closing the Appeals case, and explain to the taxpayer what is supposed to be in the transcript so the taxpayer can become aware of what’s missing.

  4. Dave Harris says:

    I am a 35-year practitioner and an avid reader of your Blog. To enable me to develop a deeper understanding of the parameters and use of CDP and CAP hearings and related tax controversy issues, can you recommend upcoming seminars, conferences or treatises. I have the Saltzman treatise dating back to my LLM days and a perhaps outdated Shriebman treatise. Many thanks.

    • The Saltzman treatise added an entire chapter on CDP a few years ago that I wrote and Les heavily contributed to and edited. I think that chapter is the most comprehensive explanation of CDP. We try to keep it up. The ABA tax section often has programming on CDP at its meetings. I am not aware of other programs that regularly address CDP issues though I have not done research on such seminars.

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